Contrary to expectations amongst property professionals, and the wider market, the UK decided to leave the EU, with 52% of the UK population in favour of leaving. The result threw markets into turmoil in early trading. A period of further uncertainty and increased volatility can be expected over coming weeks and months as financial markets and the political establishment in the UK, Europe and globally come to terms with what this means.
The real impact will be hard to assess as we face a period of uncertainty in the near term. Negotiations to exit the EU will not start until Article 50 of the Lisbon treaty is invoked. With the UK Prime Minister David Cameron stepping down, this decision will be left to the new Prime Minister and may not be until October this year. A period of at least two years will then follow as the UK agrees the terms of its exit from the EU, but this could linger for longer as trade agreements are renegotiated.
As markets, businesses and individuals take stock and adjust to the new era we now face, many decisions will be placed on hold. Equally others will be activated as some seek opportunities which doubtless will come out of this. During this time the very existence of Britain may be under threat with the potential for a second Scottish independence referendum and border poll on a united Ireland. Whilst Europe will seek to maintain its unity, the hiatus created in the markets will trigger calls for other referendums with critical elections coming up in the Netherlands, France and Germany over the next eighteen months. The loss of the UK presents major challenges to hold the EU together.
For the UK a period of weaker economic activity is inevitable and Europe will not be immune from this. Not all parties will be impacted, and activity will continue in markets that work for them or where lease events require actions. Markets reliant on trade in Europe could be impacted more. Development activity may stall in the short term as risk aversion increases. We will continue to see occupiers moving roles that it is not essential to perform in London to cheaper locations. This will be particularly true in the financial and legal sectors where offshoring and north shoring are well established trends. On the continent German cities and Paris likely beneficiaries. We do not, however, anticipate wholesale relocation of City businesses to other European centres.
Investment activity too is likely to face some short term volatility as currency markets react – the pound falling sharply against the dollar and the Euro in early trading. Buyers and sellers will adjust their strategies. We are likely to see a flight to quality in the short term with opportunities emerging for those able to ride out the cycle. It is likely there will be opportunistic buying by private investors, but institutional investors will hesitate to commit to either purchase or sale decisions until the effects of Brexit become clearer. With the real estate market awash with new capital, some investment will be displaced to other markets, in Europe and further afield.
Equally it is important to remember that in periods of uncertainty comes opportunity as global events have shown us in the past. Those who take a longer term view cannot ignore the robustness and resilience of the UK market. It is a highly regulated, liquid and transparent market. Strengths in education, research and development will continue to attract the best talent while the UK’s diverse corporate contingent will ensure the continued longevity of both occupational and investment markets.